"We cannot afford to be complacent, as we are now confronted with a new round of challenges in uncharted waters," Pang cautioned, urging international action to ward off the potential threat to global stability.

"If not properly managed, the build-up of excesses amid strong capital inflows and the subsequent bursting of the bubbles could be detrimental to financial stability, wreaking havoc on economic growth."

The remarks follow meetings last week by G20 finance ministers and the International Monetary Fund's policy steering committee at which capital controls proved a divisive issue.

The deputy chief executive himself said there was "growing recognition" that there could be "no one-size-fits-all approach" to capital flows management.

Pang said that exchange rate appreciation and monetary tightening could theoretically cool overheating economies, but "in practice" may attract even more speculative inflows and interest rate arbitrage.

He outlined three main areas for action, including regulatory reforms at the G20 and Financial Stability Board and continuing financial safety nets such as IMF lending.

National authorities should also strengthen local capacity to absorb inflows though bonds and other instruments, he said.

Pang continued: "Given the global nature of fund flows and the increasing interconnectedness of the global financial system, it is obvious that national policies alone are insufficient to tackle the challenges.

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